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Friday, 29 January 2010

Beware of guaranteed returns

There are a number of wine investment companies currently offering guaranteed returns. Investments that come under the aegis of the UK FSA (Financial Services Authority) are not allowed to promise future returns and must warn that past performance is no guarantee of future performance. Exceptions to this will usually include bank and building society savings accounts but certainly will not include wine funds, which come under the FSA as they are collective investments..

This week there was press release (see here) from Cult Wines Ltd promising a guaranted 8% return in a year on a wine investment fund:

8.5% Guaranteed return on wine investment fund from Cult Wines – London
'22/01/2010 Cult Wines of London, are offering investment portfolios with a guaranteed return of 8% over 12 months using assets of the Rothschild products such as Lafite and Mouton. The Risk is taken away from the client and provides a safety net of 8%, while the expected returns are much higher up into the double digits. This doubles any available savings rates offered by mainstream banks.'See rest of the release here.

On the face of it this would appear to be a fund that ought to require FSA authorisation and shouldn't be claiming an guaranteed return. It is, however, not a fund as Oliver Gearing, CEO of Cult Wines Ltd explains:

'It technically is not a fund as each investor is allocated cases of their own wine. The investors also retain the right to continue to hold their wine past the 12 months. In essence we give each investor the option after 12 months to sell their wine back to us at 108% of its purchase value, they can either take this if the wine hasn't increased by 8% or if it has gone up more than 8% they can ignore the option and continue holding their wine for longer. We are giving the investors a safety net but from our end backed on our own finances and assets.

Finances and assets cover the base total of chosen products from 0-108%. Our company investment/investors and of course the risk attached to the company have been carefully devised and set up with expert help. We have a master of wine, who is a contact of our family, who has been involved in the proceedings. With this combined expertise we feel quite confident in the chosen products and risk elements, being Lafite 08/Mouton 08, and we feel that we have fully covered our clients.

As it happens, we have finished running the 8% project as we have filled our small test quota up to the maximum cash budget.'

Therefore, as it is not a fund, it is not regulated by the FSA and it would appear that you can happily make claims of guaranteed returns. Another company – The Premier Bordeaux Wine Company offers a cheque for £100 and 'your certificate of entitlement to an investment that yields 14.9% per annum guaranteed'.

Also in the press release from Cult Wines Ltd is a highly selective example of a big return from one wine from a very particular vintage.

'Bordeaux Fine Wine has been the investment of the ‘Noughties’ proving to be a top-performing asset ahead of equities, houses, oil and fine art. A case of 1982 Lafite Rothschild has increased in price by 857% over the last decade, from £2,613 (Dec’ 99) to £25,000 (Nov’ 09).'

Bordeaux Fine Wine may or may not be 'the investment of the "Noughties" but you cannot prove it to have been a better performing asset than equities, houses, oil and fine art just by reference to Lafite 1982.

I'd be very wary of being offered a guaranteed return by a wine investment company.

7 comments:

With regards to our reference to Bordeaux Fine Wine being 'the investment of the "noughties"' we were referring to the following article released by liv-ex (a site you deem useful on the right hand side of this page)

So if you are going to criticise our claim that Fine Wine is a better performing asset than equities, houses, oil and fine art - then please direct it at the very qualified and knowledgeable researchers and analysts at liv-ex.

With regards to the use of Lafite 1982 as an example, in a press release/newsletter etc. there is no point in bombarding the reader with stats, so to market wine investment why not use the best example? Most other asset classes will promote their best performing investment so why can't we?

I feel like i should apologise to anyone who was mis-lead by the title of our press release, but anyone who has contacted us knows exactly how the agreement works. We were trying to achieve a USP in the market by combining the attractiveness of both investment funds and building a portfolio, as well as providing a safety net to investors when dealing with en primeur wine. This has only been a test run - to see its popularity and worthiness to us and the investor. I can assure anyone involved that their investment is both secured 100% and their wine is contracted to us as en primeur to be delivered in Spring 2011.

Although i don't believe you have been overly critical of our business, i do feel that just by our inclusion on this blog it has discredited us and this saddens me. This saddens me because i am new to this industry and have been working hard to develop good relations with many of your 'approved' companies as well as our clients. Furthermore we had been dealing with you via e-mail promptly and explaining everything in full.

As a result of this i have contacted my lawyer to see what further action i can take. I would also add that the email from which you quote our response, was sent with a Notice of confidentiality, i would like to make reference to this part:

'Notice of Confidentiality The email (and its attachment(s) if any) is intended for the intended Recipient only. It contains information, which is confidential and/or privileged and/or exempt from disclosure under applicable law.'

I was aware that Liv-ex was the source of the claim and my remarks on this high selective quote able equally to them. However, it was you at Cult Wines Ltd who chose to include it in your press release not Liv-ex.

Might I suggest that Cult Wines Ltd takes greater care in future over the wording of your press releases, something that would be required if wine investment was regulated.

I should point out that there is not a list of 'approved' merchants. Instead I have indicated some companies from whom I would consider buying investment potential wine.

I fail to understand why you decided to makes a press announcement about a scheme – 8% – that has now finished.

Your initial comment was 'you cannot prove it to have been a better performing asset than equities, houses, oil and fine art just by reference to Lafite 1982'. The evidence used by liv-ex to prove it was a better performer was the use of the following indices: Wine (liv-ex fine wine investables index), Oil (Brent Crude spot GBP), Property (FT House price index), Art (Art Price index UK), Equities (FTSE all share). At no point did we substantiate the claim that it was the best performer because of Lafite 1982. But, if we had then a fair way to compare Lafite 1982, would be to compare it as liv-ex did to the best-performing equity on the LSE - (British American Tobacco)which increased in price 454%.

Furthermore, you say that it was 'Cult Wines Ltd who chose to include it in your press release not Liv-Ex'. Liv-ex did actually include this information in a press-release - in which they used Lafite 1982 as an example of the best performing asset of the last ten years. (see link above)

Your criticism would appear to have very little substantiation. If you personally don't believe that fine wine has been the best performing asset class then please provide an equivalent measure which proves otherwise. Please do not openly criticise us for the use of publicly available and accepted information purely because you may not personally agree with it. We were stating market facts, you are simply stating your personal opinion without substantive evidence.

Your suggestion with regards to our wording has been noted, and i'll make sure a correct term is used to define our investment products in future. I hope you also take on board my comments regarding 'publicly quoting' confidential information.

We feel that your criticism and inclusion of our scheme in this article is wholly unfair and misleading and this is partly due to your mis-understanding and mis-representation of the scheme we were offering, our statement of a minimum guarantee of 8.0% is in fact a GUARANTEE to repay the investor a return of not less than this amount regardless of the actual performance of the stock in question, we take on the financial risk of returning a minimum amount on these transactions which is not unlike writing an option which requires the issuer to meet certain obligations dependant on how the market has performed. We were therefore NOT stating that an investor would receive a minimum return because in our humble opinion this stock would guarantee to meet this minimum level! As we all know only too well any investment stock can rise and fall despite many analysts attempts to predict otherwise. Despite you making contact with us and being made fully aware of the T&C's of this transaction (as our clients were) you still included us in your blog. Bear in mind that we were not restricting the investor to just an 8% increase either, their return started at 8% as their minimum guarantee.

Finally, we fail to understand why you decided to make a 'blog' about us and our scheme without any attempt to contact us and discuss the merits of the scheme and made no effort to inform us of your intentions. As you know only too well once criticisms of this nature are posted it becomes our task to defend our position and spend time and effort ensuring the correct interpretation is posted, even then damage can be irrevocable as would be investors are scared off without justification.

We would appreciate your efforts to restate any adverse commentary that you have made which we firmly believe is both inaccurate and misrepresents what we were offering as a business to an investor.

P.S. For your information there are many financial instruments governed by the FSA which do in fact offer the participants a guaranteed return and many of these are based on underlying products which rise and fall in value, despite this you can receive minimum guaranteed returns for investment, this is how an investment bank may actually lose money as they are taking on the risk of making fixed returns against floating assets. The difference here is that the investor doesn't get the upside above the fixed return whereas our scheme returned all of the value to the investor.

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